Here’s What the Jobs Report Says About the Economy

Depending on who you ask, the global economy is either on the brink of recovery or poised for ruin. The U.S. stock markets stepped into February with five-year highs in tow, which to one investor means a rotation into equities, and to another it’s the first chapter of painful consolidation. Preliminary data suggest that fourth-quarter GDP unexpectedly contracted a tenth of a percent, which to some is a sign of underlying weakness and to others just a speed bump on the road to recovery.

It’s not a perfect analogy, but if the economy were a fleet of vehicles (sputtering along at a federally-mandated average of 35.5 miles per gallon), then the Federal Reserve would be the lead car. The speed limit is 2 percent inflation, the finish line is 6.5 percent U-3 unemployment, and the rules are near-zero interest rates (which the markets are now addicted to, despite diminishing returns) backed up by tremendous asset purchases.

As far as anybody can tell, the whole mess is, over time, moving forward. No one seems sure exactly how fast it’s moving, or whether it’s meandering off course at any given point in time, but the trends suggest progress. This is evidenced by a string of indicators which all generally point in the same direction, perhaps the most important of which are the labor market reports…

On February 1, the Bureau of Labor Statistics released its monster Employment Situation report, which is like the mothership at the heart of a fleet of labor market reports. The data showed that the U-3 unemployment rate ticked upwards from 7.8 to 7.9 percent in January, with 157,000 jobs added. This was effectively in line with expectations, with jobs created at a rate near the average for the past two years.

If the number of jobs created looks unsatisfactory, that’s because it is. At this rate it would take until the middle of 2014, at the earliest, for the Fed to hit its target of 6.5 percent. That means over a $1 trillion in continued asset purchases, which would grow the Fed’s balance sheet to over $4 trillion — by most accounts a tremendously risky position to unwind.

But behind January’s numbers is good news. The figure is based off of preliminary data, and is later revised as more information comes in and is crunched. January’s report revealed that December’s increase in non-farm payroll employment was revised from 155,000 to 196,000, a much healthier rate. What’s more, November’s increase of 161,000 was revised to 247,000, as satisfying a pace as any economist could hope for in the current climate.

The new data moves the average rate non-farm job growth to 181,000 for 2012, which is definitely a leg up from where things were previously.

The major unemployment report is flanked by a number of satellite reports that support the case for optimism. The ADP National Employment Report showed that 192,000 private-sector jobs were added in January, which is more than expectations for about 172,000. The ADP report shows that rate of job creation in the private sector has been increasing for the past six months, and that growth is near pre-crisis levels. The four-week moving average for initial unemployment claims is also lower in January than it was last year.

All said, this does not mean that the road to recovery for the labor market will be smooth from here on out, but it is encouraging. It means that we’re at least on the right road, instead of just taking all left turns and hoping for the best.